Inside Health

DEALBOOK; WellPoint Will Buy Amerigroup to Expand in Medicaid and Medicare Markets

By REED ABELSON and MICHAEL J. DE LA MERCED

Published: July 10, 2012

4:19 p.m. | Updated

WellPoint agreed on Monday to buy Amerigroup in a deal valued at $4.9 billion in cash, as one of the country's biggest health insurers seeks to take advantage of an expansion of health care coverage instituted by the Obama administration.

The proposed acquisition demonstrates the increasing consolidation of health insurers at a time of significant change as the federal health care law, the Affordable Care Act, has put enormous pressure on those in the industry to better control costs.

WellPoint is already a giant of the health care industry, providing insurance under the Blue Cross and Blue Shield brands in 13 states. Buying Amerigroup will significantly bolster its presence in the government-financed markets of Medicaid for low-income individuals and Medicare for the elderly and disabled.

WellPoint is paying a significant premium to embark on such an expansion. Under the terms announced on Monday, the company will pay $92 a share in cash, a 43 percent premium to Amerigroup's Friday closing price of $64.34. WellPoint expects the deal to add to earnings beginning next year, adding more than $1 a share by 2015. It is expected to close in the first quarter of next year.

The deal is one of WellPoint's largest since the company was formed from a 2003 merger, according to data from Standard & Poor's Capital IQ. The company has been a serial acquirer in recent years, having bought 1-800 Contacts, a contact lens retailer, and CareMore, a provider of managed care for the elderly, over the last 12 months alone.

Shares of WellPoint rose 3.4 percent on Monday, to $61.95, while shares in Amerigroup soared 38 percent, to $88.79, but they remained below WellPoint's offer, suggesting some investor uncertainty over the prospects of the transaction.

Both companies said the deal made sense regardless of the fate of the health care overhaul, which the Supreme Court upheld two weeks ago. But the court's decision was mixed on Medicaid.

''Medicaid is going to be a big growth market for the big health insurers,'' said Edward Kaplan, a senior vice president of the Segal Company, which advises employers on health benefits. ''Fifteen to 20 million lives will be up for grabs in 2014, and WellPoint wants some of those lives.''

The Supreme Court decision also appears to give states more latitude in deciding whether to participate in the Medicaid expansion, and some governors have intimated that they may pursue shrinking their enrollment rather than growing it.

''The motive of the states to reduce enrollment is considerable, both in budget and political terms,'' said Richard Evans, an analyst at Sector and Sovereign Research in Stamford, Conn.

Mr. Evans said that while federal officials were likely to try to find an eventual compromise with recalcitrant states, he estimates that as many as 13 million people live in states where Republican lawmakers could opt out of the federal expansion and reduce the number of individuals who are enrolled.

Company officials discounted the possibility that state officials would make good on their threat to turn down significant federal money, emphasizing that the merger made sense even without the expansion.

''We have an expectation and belief that the opportunity in Medicaid will continue no matter what,'' Ms. Braly said.

WellPoint executives also said the acquisition made sense in light of the law's creation of state exchanges, where low-income individuals are expected to be eligible for subsidies to help buy coverage in 2014.

On a conference call on Monday, Ms. Braly cited estimates of about nine million people who are ''dual eligible'' for Medicaid and Medicare, a group that accounts for some $300 billion in spending.

WellPoint also did not rule out offering plans in states where it is not licensed to use its popular Blue Cross brand.

WellPoint was advised by Credit Suisse and the law firm Linklaters. Amerigroup received advice from Goldman Sachs, Barclays and the law firm Skadden, Arps, Slate, Meagher & Flom.

This is a more complete version of the story than the one that appeared in print.